What Happens When a Married Couple Files for Bankruptcy in California?

If you and your spouse are struggling with debt, you may be wondering: What happens when a married couple files for bankruptcy in California?

When a married couple in California files for bankruptcy, all community property—assets and debts acquired during the marriage—becomes part of the bankruptcy estate. In most cases, eligible debts are discharged, offering financial relief.

With decades of experience helping couples navigate bankruptcy, I’ve guided many clients through the process of protecting their assets while eliminating overwhelming debt. Let’s explore how bankruptcy affects married couples and what you need to know before filing.

Understanding Marriage and Bankruptcy in California

There are numerous considerations an individual must consider when looking into bankruptcy as an option for addressing debt. When you are a married couple in California, the financial issues are even more complex and thorny. You are no longer just dealing with your own struggles with debt because your spouse’s interests and future are also at the forefront. You are united as a team personally, financially, and in many other ways. With bankruptcy, you could take advantage of the benefits, but you would also be affected by factors afterward.

As such, you must understand what happens when a married couple files bankruptcy in California. Plus, it is important to know how bankruptcy laws work when you are married but filing as an individual. The implications are different, and you will want to choose the option that best fits your situation. You can rely on a California bankruptcy attorney to provide personalized advice on filing and assist with the process. Some basics about bankruptcy for married couples is also useful.

Overview of Joint v. Individual Bankruptcy

If you are married, you have the option to file bankruptcy as an individual or together with your spouse. The type of case you file will vary according to your objectives and circumstances, but your first important decision must be joint versus individual bankruptcy. If you go it alone with your bankruptcy petition, you can discharge all eligible, unsecured debt that belongs to you. The non-filing spouse will still retain their own individual debt.

The downside is that the non-filing spouse may be on the hook for some joint debts that the filer cannot discharge in bankruptcy. For this reason, it often makes more sense for married couples to file bankruptcy jointly. In addition, a married couple can protect more in terms of exemptions, some of which are doubled when spouses file jointly.

How Does Filing for Bankruptcy Affect Community Property in California?

California is a community property state, meaning most assets and debts acquired during a marriage belong equally to both spouses. When a married couple files for bankruptcy, community property laws directly impact what assets are included in the bankruptcy estate and what protections are available.

1. What Happens to Jointly Owned Assets?

• In Chapter 7 bankruptcy, all non-exempt community property becomes part of the bankruptcy estate, meaning the trustee may sell certain assets to pay creditors.
• Exempt property (such as homestead equity, vehicles, and retirement accounts) may be protected under California bankruptcy exemptions.
• If only one spouse files, community property is still part of the bankruptcy estate, meaning assets acquired during the marriage could be affected.

2. Can Creditors Still Go After My Spouse?

• If a joint debt is discharged through bankruptcy, creditors cannot pursue the filing spouse but may still attempt to collect from the non-filing spouse if they were jointly liable.
• Filing jointly eliminates both spouses’ liability for community debts, providing more comprehensive debt relief.

3. What If One Spouse Has More Debt Than the Other?

• If most debts belong to one spouse, filing individually may be a strategic option to protect the other spouse’s credit score.
• However, if both spouses are burdened by shared debts, a joint bankruptcy filing often provides the most protection.

How This Affects Your Bankruptcy Strategy:

• Understanding how California’s community property laws impact bankruptcy helps couples choose the best filing option.
• If you have significant joint debts, filing together may be the best option to maximize debt relief and protect shared assets.

How Chapter 7 Bankruptcy Works in California

A Chapter 7 case is called discharge bankruptcy because it eliminates all qualifying debt when you complete the legal process. To ensure this remedy is available to those who are in dire need of financial help, the rules to qualify are stringent. You automatically qualify if your earnings are less than the state median income level, but there is a second option. You could be eligible for Chapter 7 if you pass the Means Test, which assesses your income and monthly expenses.

When filing for Chapter 7, you must be prepared for another important rule about liquidation. During the process, the bankruptcy trustee can sell your assets to satisfy debt to creditors. You can protect your assets through exemptions and by filing as a married couple, you double the amount for many exemptions.

Chapter 13 Bankruptcy Summary

The final outcome in Chapter 13 is similar to Chapter 7 in that you discharge all qualifying debt at the end of the process. However, instead of satisfying debt to creditors through selling your assets, you will enter into a debt repayment plan. Over a 3 to 5-year period, you will pay back a portion of what you owe to creditors. As a result, the most important rule to qualify is your employment. You are eligible for Chapter 13 bankruptcy if you have a job and regular income to meet the terms of the debt repayment plan.

Through the plan, your debts are combined into a single amount that you pay monthly. At the end of your case, you will probably pay just a percentage of what you owe. All remaining debts are eliminated through Chapter 13.

Steps in the Bankruptcy Process

After you decide on filing jointly versus individually, the legal process for Chapter 7 and Chapter 13 are similar. The key difference is that there are stages in which you will focus on developing the Chapter 13 debt repayment plan. Your California bankruptcy attorney will assist with the essential tasks, as well as other requirements for your case. The steps of a bankruptcy proceeding work as follows:

• Take the required credit counseling course within six months prior to filing for bankruptcy;
• Collect, review, and organize all financial documents, including those covering your assets, debts, and income;
• Prepare and file the bankruptcy petition;
• Attend the meeting of creditors, where you will be asked questions about your finances, petition, and debt repayment plan; and,
• Finalize the case and obtain the discharge order.

Post-Bankruptcy Benefits for Married Couples in California

When you file a bankruptcy case jointly as a spouse, there are consequences for both of your credit ratings. A Chapter 7 case stays on your report for ten years, and Chapter 13 remains for seven years. If you file individually, the non-filing spouse will retain their credit score. Still, the effects on your credit should not be the only consideration when there are numerous benefits to bankruptcy.

Without the debt burden looming over your life, you ease stress and get a fresh start. Though it can take time to rebuild credit, you do have the option of a secured credit card or line of credit. You also create a positive track record by paying your mortgage, utilities, and other bills. Eventually, you can apply for credit, but make sure you do not overextend. Lessons from your mandatory credit counseling session should be helpful.

Will Filing Bankruptcy Together Hurt Both Spouses’ Credit?

One of the biggest concerns for married couples considering bankruptcy is how it will impact their credit scores and financial future. While bankruptcy does appear on both spouses’ credit reports if filed jointly, there are strategies to minimize long-term consequences.

1. How Bankruptcy Affects Your Credit Score

• A Chapter 7 bankruptcy remains on a credit report for 10 years, while a Chapter 13 bankruptcy remains for 7 years.
• Both spouses will see a temporary drop in their credit scores, but the extent of the impact depends on their previous financial history.
• If only one spouse files, the non-filing spouse’s credit remains intact, but any joint debts may still appear as delinquent.

2. Can You Rebuild Credit After Bankruptcy?

Yes, it’s possible to rebuild credit after bankruptcy by:

• Making on-time payments for remaining debts like mortgages, car loans, and student loans.
• Applying for a secured credit card or a credit-builder loan.
• Keeping credit utilization low and avoiding taking on excessive new debt.

3. How Long Does It Take to Qualify for New Credit?

• Many filers receive credit card offers within a year after bankruptcy, though with higher interest rates.
• Some lenders offer mortgage loans after two to four years, depending on how well borrowers rebuild their credit.
• Auto loans and personal loans may become available even sooner, especially for those with stable income and low debt-to-income ratios.

How This Affects Your Bankruptcy Decision:

• If one spouse has strong credit, filing individually may be an option to protect the non-filing spouse’s credit score.
• Filing jointly will have a greater immediate impact, but it can also provide a fresh financial start for both spouses.
• Regardless of which path you choose, credit recovery is possible with responsible financial management.

Additional Facts About Chapter 7 and Chapter 13 Bankruptcy in California

There are a few more details about bankruptcy cases that you should know when considering whether to file as a married couple in California:

• One of the most effective benefits of filing bankruptcy kicks in the same day you file your petition. The bankruptcy court issues an automatic stay on creditor efforts to collect debt from you. They cannot take any legal action, such as a lawsuit or wage garnishment.
• There are two systems in California for exemptions in Chapter 7 bankruptcy. You may increase the value of many of them when filing jointly with your spouse.
• Remember that you cannot discharge all debts in Chapter 7 or Chapter 13 bankruptcy. You will still be responsible for paying alimony, child support, and certain types of taxes.

Our California Bankruptcy Lawyers Will Assist with Your Options

If you are a married couple in California and are considering filing Chapter 7 or Chapter 13, you can see how important it is to develop a strategy that fits your needs and your spouse’s interests. Our team at Kostopoulos Bankruptcy Law has in-depth knowledge of the laws, so we are prepared to guide you. Please get in touch with our firm today to set up a consultation with a skilled California bankruptcy attorney.

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